Published on 27/10/2021 10:42:57 AM | Source: Accord Fintech

Ind-Ra revises downwards domestic PV growth estimates to 15-18% for FY22

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Citing semiconductor shortage that could extend to 2022, India Ratings and Research (Ind-Ra) has revised downwards the domestic passenger vehicle (PV) growth estimates to 15-18 per cent this fiscal. The agency had earlier forecasted an 18-22 per cent growth for the Indian PV market, now it said further downside risk remains for the segment. It also said ‘any normalisation in production remains contingent on a softening of demand from various end-consumers of chips and an increase in chip production globally’. It added that while certain Indian PV manufacturers have indicated an improvement in production during October 2021 over August and September, the continuing surge in chip demand globally and time lag to set up new capacities could keep the supply limited.

The rating agency said normalisation can only be envisaged to happen by the end of the second half of 2022. Based on its discussions with industry peers, Ind-Ra said the chip shortages could extend to 2022 and the situation remains highly uncertain. Given the time lag and the challenges of expanding chip capacity, the shortages could worsen and the situation may not normalise before 2H 22 (second half 2022). It said ‘In fact, we may experience an oversupply post the planned chip manufacturing capacities come onstream in 2023 and 2024 coupled with the demand normalisation in the personal computer/laptop segment’. The sharp increase in demand for chips and the shorter tenor nature of contracts with the auto sector have allowed chip manufacturers to cater to the technology sector. Sales to the latter provide not only higher realisations but also greater visibility through longer tenor contracts.

On the other hand, to overcome the situation, Ind-Ra said, the automobile manufacturers are focusing on ‘using the available supplies to produce models which are more profitable, reflecting a lower drop in volumes of premium models in the Indian market’. Considering the importance of chips in the overall production, although the cost of chips in a vehicle is minimal at around 1 per cent), OEMs are increasingly negotiating with chip manufacturers and looking at minimising uncertainties through long-term contracts and sourcing. As for electric vehicles, Ind-Ra said ‘It is unlikely that chip shortages would have any material impact in its trajectory, given the challenges pertaining to the high cost of ownership and lack of charging infrastructure’. However, it added that there could be some negative impact on the overall volumes.